Last month, AARP sued the Housing and Urban Development Department over a handful of reverse mortgages gone awry. Lenders, following the letter of one of HUD’s rules, are requiring newly widowed people who want to stay in their homes, to pay off the balance of their loans quickly, even if it is much more than the value of the home. Because they can’t (or won’t), the lenders are foreclosing.
This is happening only to a small number of people who did not have their names on the reverse mortgage for a variety of reasons. Some spouses did not put their names on the applications in order to qualify for a bigger loan, without necessarily realizing that they were putting themselves in jeopardy.
In 2008, HUD, worried about falling housing prices, issued what it called a clarification. The upshot of HUD’s notice is that the home is subject to foreclosure upon the death of the borrower if the estate or heir (say a spouse who was not on the original reverse mortgage) wants to keep the home but is unable to pay off the balance. The heir would have to pay that amount, no matter what the home was worth. Here’s the practical result of all this: Let’s say a widowed spouse who wasn’t a party to the reverse mortgage loan inherited the home. She could sell it without having to pay the lender anything more than the prevailing market price (or a even little less) as long as she followed a few simple rules.
But if she wanted to stay in the home, the HUD rule would force her to pay off the entire original balance fairly quickly, even if it was for way more than what the home was actually worth because of declining home values.
And why might a spouse not be on the reverse mortgage loan? If her husband is 64 and she is under 62, she wouldn’t be eligible. Or one spouse may have owned the home and taken out the reverse mortgage before the marriage.
A more likely possibility, however, is that lenders encouraged younger halves of a couple not to put their names on the mortgage. Why? Well, when the older half of the couple applies alone, he or she qualifies for more money.
As complicated as this particular legal dustup appears, there is a simple moral. If you’re a couple with plans to take out a reverse mortgage — and it really ought to be a last resort, only for those who can’t make ends meet any other way — both of you ought to be on the reverse mortgage so you don’t end up in this predicament. Always talk to at least 2 counselors from 2 different organizations, 1 preferably an elder law attorney with reverse mortgage experience.
